What is a Venture Capital Fund?
The term venture capital is sometimes misleading because it can be associated with a many types of investors. The most common use of the term refers to the venture capital fund. What is a venture capital fund?
What is a venture capital fund? It is a pooled investment vehicle that manages the funds of third party investors It is very similar to mutual funds in this way with the major differences being the targeted investments. Venture capital funds invest in higher risk companies unable to secure normal conventional financing. They also tend to take a more active equity position in the company and be more involved in management as part of the financing deal. The goal of the venture capital is generally to bring the targeted company to a favorable IPO position where the equity position is rewarded with a substantial return on investment.
The important element of the venture capital fund is the fund managers. They are usually highly skilled professionals with a great deal of experience in managerial and financial areas. The investment funds come from many sources. These include individuals, State and private pension funds, foundations, and insurance companies. Even mutual funds provide a source of investment capital.
The mutual fund idea is to provide a widely diverse portfolio of investment opportunities and the venture capital fund represents the higher risk, higher return portion of that diversity. The normal venture capital fund controls a very large amount of investment capital and tends to make large single investments. Their targeted companies are usually either established and profitable and seeking large expansion, or are start-ups on a larger than normal scale.
One of the consistent and important features of the venture capital fund is a process called “due diligence.” This refers to the extensive research done on the targeted company to insure the viability of the investment. This process differs from what would be done by a normal investor or financial institution because the venture capital fund managers would also be looking for ways that their participation in management could insure success. The idea would be that the assistance would not be merely in the form of cash, but would include management and financial services expertise provided by the fund managers.
Although most small investors do not even realize it, they are often involved in venture capital funds through participation in such things as their pension plans or investments in mutual funds. The venture capital fund has the primary goal of making profit for its investors, but they serve an important social purpose also. By investing in cutting edge technology and encouraging those left behind by conservative traditional financing, they keep pushing society forward and keeping us competitive in an increasingly global market.